The Money Spy website

Welcome to The Money Spy....This is where we will be posting articles, latest news updates, opinions, prompting discussions or just about anything interesting related to finance. If you would like to contact us then call 01892 506970 or email info@themoneyspy.net

There are two big question marks hovering over the UK economy. The answers may determine whether the UK is seeing a temporary recovery or something a good deal more real.

First consider the surveys. Every month Markit and CIPS get together to produce Purchasing Managers Indices (PMIs) covering UK manufacturing, construction and services. Then they add them all together and produce a composite index. Over the last few months these indices have been really rather exceptional. A couple of months back the composite PMI hit an all time high. Okay data only goes back to 1998, even so it was impressive stuff. Since then the PMIs have fallen back a tad, but they still remain way above historic averages.

Some economists reckon that the PMIs are consistent with quarter on quarter growth of around 1.5 per cent. To put that into perspective, there aren’t many emerging markets growing that fast.

But here is the thing, the hard data from the Office of National Statistics (ONS) is not so good. For the third quarter of last year the ONS had quarter on quarter growth at 0.8 per cent. That growth rate is good, compared to what we have become used to it is marvellous, but it was less than the level the PMIs were indicating.

As for Q4 of last year, the PMIs suggested that was even better than Q3. Alas, not so the data from the ONS, it had the economy growing by 0.7 per cent. Okay, that growth rate may get revised upwards, but it is still way down on what the PMIs suggest.

Drilling down, construction may provide a partial answer. The ONS had this contracting 0.3 per cent in the last quarter of last year, the PMIs had it surging to its highest level in several years. Since then the PMIs tracking construction have got even better. This suggests that the ONS will either revise its estimate of construction’s contribution to UK growth in Q4 upwards, or we will show a marked improvement in Q1.

The latest PMIs also point to the largest backlogs in orders within the services sector since May 2007. That seems to suggest we are either set to see the sector’s output surge, or we may get rising prices instead. Or both.

Then there is business confidence, in the services sector this rose to its highest level since 2012.

These days, it’s popular to talk about that elephant in the living room. You hear the phrase so often, that is a wonder there are any elephants left in the wild, so busy are they filling up our livings rooms. Well apologies for adding to living room congestion, but as far as the UK economy is concerned there are two elephants in the living room

Elephant number one is household debt/house prices. Part of the UK’s recovery is coming on the back of rising house prices, making households feel richer, encouraging them to spend more. This is not new, the idea that the government is repeating the mistakes that led to the finance crisis in the first place is rehearsed most days in the media, and indeed by politicians. Some deny it of course. But one piece of hard data needs to borne in mind. The fact is in Q3 of last year the savings ratio fell, this was the main contributor to growth. We haven’t got the data for Q4 yet. But given the imminent retirement of the baby boomers, is creating growth via less households savings really a good idea?

The other elephant in the living room is cash sitting on corporate balance sheets. If they could be persuaded to spend it, ideally invest it, the UK economy would boom like it hasn’t done for a very, very long time.

Just to remind you, according to the PMIs work backlogs are soaring, business confidence is rising, might that be enough to get companies spending again?

What will you be doing when you are over 65, assuming that is that you are not already over that age? Do you think you will still be working? Now forward wind the clock. Let’s for the sake of argument say the date is 2035, meaning that if you are 43 today, you will be passing the 65 mark. What will things look like then?

This is perhaps the single most important underlying force at the work in the UK economy today. It may determine future growth, future prosperity, or indeed poverty. Understand this, and you are closer to understanding what is really going on beneath the surface.

According to the Office of National Statistics (ONS), between February and April this year just over one million people over the age of 65 were in work. It was the first time ever that this number topped the million mark. The ONS says the rise in the number of over-65’s working is partly down to more people staying on at work and also more people of this age group in the population.

So let’s drill down a little. In April 1992, 478,000 over-65’s were working. That was 94.2 of the population of this group. By April 2000, not a lot had changed. 457,000 over-65’s were working, or 94.7 per cent of the population of this age group. Throughout the noughties things did change, however, and by quite a lot. Between 2000 and 2013 the number of over-65’s in the UK leapt from around 480,000 to about 1.1 million. During that same period the percentage over 65 who were working rose from just over 5 per cent, to a fraction less than 10 per cent.

In 2013, the proportion of the UK population over 65 is around 16.5 per cent.

Now forward wind the clock. The ONS reckons that by 2035 the population of over-65’s will be around 17 million or 23 per cent of the overall population. Assuming the proportion of those over 65 in employment stays the same, this means that by 2035 roughly 1.7 million will be working. Given that it seems certain the proportion of over-65’s working will rise, that means by 2035 the number of over-65’s with jobs will probably exceed 2 million, and will more likely top 3 million, even more.
Is this a disaster for UK plc?

Superficial analysis says that as more over-65’s work, there will be less work for under-65’s. But that is not how it is supposed to pan out. The more people in the UK who are earning, the higher will be demand, and demand creates new jobs.

There is another point, however. The appalling performance of the stock market over the last 13 years, combined with the fragility of the housing market, means that this growing population cannot just assume their pension pots will grow at the kind of rates enjoyed by those who were saving in the 1980’s and 1990’s for example.

But is it a good thing that more older people are working and that this number is set to rise?

One way of looking at is to say consider the alternative. Would you rather live longer but work longer, or would you rather it was like the 1960s, when you retired at a younger age, but almost certainly keeled over a good deal younger too?

And here is a bit of selfishness for you. The author of this article would actually quite like it if he was still writing until the day he died, providing that day is still some time off – say when he is 110…

When the Office of National Statistics (ONS) revealed data to show the UK economy was contracting again at the end of last year, a lot of people were surprised.

So cast your mind back to January 2012, or 25 January to be precise. The UK’s official statistical authority released data showing that the UK contracted by 0.2 per cent in Q4 2011. At the time, many economists said they didn’t believe the data.

When the ONS updated its figures, many thought they would be revised upwards, but instead the data got worse – so much so that now the ONS has the UK contracting by 0.4 per cent in Q4 of last year.

But the puzzle related to the Purchasing Managers’ Indices (PMIs). The PMI for manufacturing stood at 49.6 in December 2011, the PMI for construction stood at 53.2 and for services at 54. Markit, which was the co-complier of the PMI data, said that the figures were consistent with zero growth in the quarter. At the time many economists said that they thought the PMIs gave a more accurate picture.

Three months later, the story was even more puzzling. According to the ONS, Q1 2012 saw 0.3 per cent contraction. In March 2012 the manufacturing PMI stood at 52.1, the index covering construction stood at 56.7 and the index for services stood at 55.3. Markit said the data was consistent with growth of 0.5 per cent.

Even more economists said they thought the PMIs gave a more accurate story.

And yet the ONS data just carried on being bad. In fact, it finally recorded three quarters of contraction: Q4 2011, and Q1 and Q2 this year. It was a puzzle, all right.

Now forward wind the clock to today. The ONS recorded a 1.0 per cent growth rate in the quarter just gone. Yippee, thank goodness for that news.

Except the PMI for manufacturing in October was 50.6; for construction it was 50.9 and for services 47.5.

The fact is that when the UK economy was supposedly in recession Markit data suggested growth.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

Think of it in terms of mountain climbing. A recession is like falling down the mountain. A downturn relates to that period of time following the fall, in which you are trying to climb back up.

We didn’t know it at the time, but in early 2008 the UK was at the top of a mountain. As recession bit, it fell from the summit. And then it stayed down. As other countries, most noticeably the US and Germany, climbed back up and started gaining fresh altitude, the UK stumbled along in the valley.

Then at the end of last year, the UK did something rather disturbing. It fell from the valley into another even deeper valley. It entered recession, whilst still in a downturn.

According to data from the Office of National Statistics out this morning, the UK climbed out of the deeper valley in Q3.

This then is the story of the last 12 months. In Q4 2011 UK GDP contracted by 0.4 per cent. In Q1 2012 it contracted by 0.3 per cent. In Q2 it contracted by 0.4 per cent. In Q3 it grew by 1.0 per cent.

It means that UK output is now just 0.1 per cent below the Q3 2011 level. In other words, it has climbed out of the deep valley, and is within reach of the slightly higher valley.

The summit it occupied just under five years ago still towers above, however.

It’s the longest downturn on record. And right now the UK’s output is still almost 4 per cent below its peak.

But is it the beginning of the recovery? Does economic Shangri-la await us in the valley of prosperity over the mountain?

The question mark partly relates to the effect of one-offs. Q2 saw a slump because of lost production caused by the jubilee weekend. Q3 made up for that lost ground. Then there was the Olympic games.

Vicky Redwood, Chief UK Economist at Capital Economics, reckons that of the 1 per cent jump, around 0.7 percentage points was down to one-offs.

She said: “And as the Olympic effects unwind, it is still possible that the economy contracts again in Q4. This would leave GDP in 2012 as a whole shrinking.”

Markit’s Mark Williamson said: “There is a real risk that a return to contraction might be seen again in the fourth quarter. The business surveys have signalled a slowing in the pace of growth to near stagnation in September, and consumer surveys have meanwhile shown households to have grown more pessimistic about their financial outlook in October. It also seems unlikely that exports will act as a spur to growth, with recent PMI surveys showing ongoing malaise in key export markets such as the US, China and in particular the Eurozone. There is also increasing evidence that companies are focusing on cost-cutting in the light of the gloomier outlook, trimming headcounts, cutting investment and reducing other non-discretionary costs such as advertising and marketing.”

Still, be grateful for small mercies and Q3’s data was at least that. As for David Cameron letting it slip in parliament that good news was on its way, maybe he was just suffering from altitude sickness.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

If you had read the ‘Sunday Times’ this weekend you could be forgiven for believing the UK is at last on the mend. The good old days are set to return. No more bust; lots more boom. Except –

Well, before we get to the ‘except’ part, let’s remind ourselves of the news that one just has to accept is good.

Employment hit its highest level ever in the three months to August, says the Office of National Statistics, and unemployment fell to 7.8 per cent during the same period, which is the lowest level since spring time 2011. Inflation is falling too, with the CPI rate going down from 2.5 per cent in August, to 2.2 per cent in September. Okay, with averages wages in the year to August rising by 1.7 per cent, the average worker was worse off, but the gap between inflation measured by this index and rising wages was the smallest since April 2010. And finally, if that isn’t enough good news for one day, other data out last week revealed a good month for the High Street, with retail sales rising by 0.6 per cent in September on the month before. Apparently, total sales were at their joint highest ever in the month.

Except…

There are several problems, but here is the big one – at least it’s a theory, and it’s a view not recognised by economists.

Saving is the new black. Saving has become fashionable. During the boom getting into debt was seen by some as a form of machismo, but now saving is the all the rage. That is partly why interest rates are so low. The Bank of England reckons we are saving too much, so its cuts rates in order to encourage less saving and more borrowing.

There are several reasons for this rise in the popularity of savings. During the 1990s we enjoyed money for nothing as stock markets boomed. Modest savings put into a pension fund rose at a pace that was completely off the charts in comparison with rising output. Who needed to save much, when most of us appeared to be guaranteed a prosperous retirement regardless?

The stock markets crashed, and the FTSE 100 peaked on December 30 1999, and it still languishes around 1,000 points below that level. But then house prices surged. Who needs to save when year in, year out our homes rise in value at a rate almost as high as our annual salary?

The retirement of the baby boomers always was a problem in the making, but the snag is that we had a finance crisis before this generation got around to retiring, making a bad problem a good deal more serious.

In 2008, many economists were missing the possibility that saving rates may start to rise. They are missing it again.

In Q2 this year income per household rose by an average of £69 (after allowing for inflation), yet spending fell. Why? Because the extra money was saved, lifting the savings ratio from 6.0 per cent in Q1 to 6.7 per cent. Some economists say that as inflation falls below increases in average wages, spending will start to increase, which will lift the UK out of recession into sustainable growth. Maybe, but it is equally possible the difference will just be saved as panicking baby boomers fret about how they will fund their old age.

What is the solution? There are limited answers, but one is for the government to take the money UK individuals are so keen to lend to it, and use it to fund investment in public infrastructure and, even more importantly, in providing funding for budding entrepreneurs.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

It was told here a couple of weeks ago how there were signs of green shoots. For example, industrial production in July saw its biggest month on month rise in 25 years. No less than 236,000 more people gained employment in the three months to the end of July.

That’s all very encouraging, but…

Last week saw the latest Purchasing Managers’ Indices (PMIs) from Markit/CIPS, and to put it mildly they weren’t very good.

In a nut shell, the PMI covering UK manufacturing fell from a score of 48.7 in August, which was poor, to 47.6 in September. Bear in mind, any score under 50 is meant to denote contraction. The PMI for construction improved, but only mildly and from a low level. It rose from 49 to 49.5. As for services, the Business Activity Index fell from 53.7 to 52.2. Put them all together, allow for the importance of each of the three sectors to the UK economy and you get a composite reading of 51.1 from 52.2 in August. Markit reckons these indices suggest quarterly growth of 0.1 per cent.

Okay, that’s not much growth, but at least it is growth. Does that not mean the three reports combined suggest the UK is slowly pulling out of recession? Well maybe. But just bear in mind, that earlier this year when official stats proclaimed that the UK was in recession, cynics pointed to other data which painted a slightly more positive image of the economy.

Put it this way, when the Office of National Statistics said the UK was in recession, the PMIs suggested mild growth. Now the PMIs have deteriorated.

Sorry to leave this on such a downbeat note, but the PMIs indices covering employment painted an even worse picture. The PMI employment index fell to 48.1 – that’s a ten month low and consistent with unemployment rising.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here